Last Friday the IRS published an updated version of its publication "The Truth About Frivolous Tax Arguments." This publication provides a list of common frivolous arguments advanced by individuals and groups who oppose compliance with the federal tax laws.
Individuals have continued to advance frivolous arguments to the IRS, state tax authorities, and courts, despite the fact that these theories are universally rejected by courts. Tax authorities and courts have various tools to deter such conduct. For example, taxpayers who advance frivolous arguments before the United States Tax Court are subject to sanctions under I.R.C. section 6673(a) up to $25,000 per proceeding if the court finds that the taxpayer's position in such proceeding is "frivolous or groundless."
The Internal Revenue Code also provides a penalty for frivolous returns and submissions under section 6702. For purposes of penalties under section 6702, a return or submission is considered to be frivolous if it is based upon a position that the IRS has identified as being frivolous, or which reflects a desire to delay or impede the administration of federal tax laws. The IRS identifies positions it considers to be frivolous through Notices that are published periodically. The current listing of frivolous positions is published as IRS Notice 2010-33.
Notice 2010-33 and the other frivolous position listings are similar to the recent IRS publication "The Truth About Frivolous Tax Arguments" in that they both list many of the same frivolous theories, but the latter publication provides a more detailed breakdown of each frivolous argument along with relevant caselaw refuting each argument. For example, the IRS discusses the contention that taxpayers can reduce their federal income tax liability by filing a "zero return":
Contention: Taxpayers can reduce their federal income tax liability by filing a "zero return."
Some taxpayers attempt to reduce their federal income tax liability by filing a tax return that reports no income and no tax liability (a "zero return") even though they have taxable income. Many of these taxpayers also request a refund of any taxes withheld by an employer. These individuals typically attach to the zero return a "corrected" Form W-2, or another information return that reports income and income tax withholding, and rely on one or more of the frivolous arguments discussed throughout this outline to support their position.
The Law: A taxpayer that has taxable income cannot legally avoid income tax by filing a zero return. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Courts have repeatedly penalized taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability or permit a refund of tax withheld by an employer. Courts have also imposed the frivolous return and failure to file penalties because such forms do not evidence an honest and reasonable attempt to satisfy the tax laws or contain sufficient data to calculate the tax liability, which are necessary elements of a valid tax return. See Beard v. Commissioner, 82 T.C. 766, 777-79 (1984). The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2004-34, 2004-1 C.B. 619. Furthermore, the inclusion of the phrase "nunc pro tunc," or other legal phrase, does not have any legal effect and does not serve to validate a zero return. See Rev. Rul. 2006-17, 2006-1 C.B. 748.
This recent IRS publication serves as a reminder that despite the penalties, sanctions, written guidance, and other efforts aimed at deterring frivolous arguments, some individuals continue to divert administrative resources and clog the court dockets with completely meritless positions. This conduct consumes an inordinate amount of limited government resources at the expense of taxpayers who have legitimate tax disputes to resolve. In addition to the wasted government resources, individuals who are persuaded by promoters to advance these arguments are often left holding the bag with considerable penalties, interest, and headaches.